Eugene Linden
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Trump, the Toxic Legacy of the Financial Crisis

Today, the Lost Angeles TIMES published my oped as part of a a package on the first anniversary to Trump's election. Space was limited, so I tho...

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Biodiversity

THE PROBLEM: Man is recklessly wiping out life on earth
BY EUGENE LINDEN


Monday, Jan. 02, 1989
Before Brazil's great land rush, the emerald rain forests of Rondonia state were an unspoiled showcase for the diversity of life. In this lush territory south of the Amazon, there was hardly a break in the canopy of 200-ft.-tall trees, and virtually every acre was alive with the cacophony of all kinds of insects, birds and monkeys. Then, beginning in the 1970s, came the swarms of settlers, slashing and burning huge swaths through the forest to create roads, towns and fields. They came to enjoy a promised land, but they have merely produced a network of devastation. The soil that supported a rich rain forest is not well suited to corn and other crops, and most of the newcomers can eke out only an impoverished, disease-ridden existence. In the process, they are destroying an ecosystem and the millions of species of plants and animals that live in it. An estimated 20% of Rondonia's forest is gone, and at present rates of destruction it will be totally wiped out within 25 years.

Around the globe, on land and in the sea, the story is much the same. Spurred by poverty, population growth, ill-advised policies and simple greed, humanity is at war with the plants and animals that share its planet. Peter Raven, director of the Missouri Botanical Garden, predicts that during the next three decades man will drive an average of 100 species to extinction every day. Extinction is part of evolution, but the present rate is at least 1,000 times the pace that has prevailed since prehistory.

Even the mass extinctions 65 million years ago that killed off the dinosaurs and countless other species did not significantly affect flowering plants, according to Harvard biologist E.O. Wilson. But these plant species are disappearing now, and people, not comets or volcanoes, are the angels of destruction. Moreover, the earth is suffering the decline of entire ecosystems -- the nurseries of new life-forms. For that reason, Wilson deems this crisis the "death of birth." British ecologist Norman Myers has called it the "greatest single setback to life's abundance and diversity since the first flickerings of life almost 4 billion years ago."

Nearly every habitat is at risk. Forests in the northern hemisphere have fallen to lumbering, development and acid rain. Marine ecosystems around the world are threatened by pollution, overfishing and coastal development. It is in the tropics, though, that the battle to preserve what scientists call biodiversity will be won or lost. Tropical forests cover only 7% of the earth's surface, but they house between 50% and 80% of the planet's species.

But should people in developed countries care about the survival of tropical species never seen outside a rain forest? Yes, they should. Variety is the spice of life, goes the saying. Biologists would go further and argue that variety is the very stuff of life. Life needs diversity because of the interdependencies that link flora and fauna, and because variation within species allows them to adapt to environmental challenges. But even as the world's human population explodes, other life is ebbing from the planet. Humanity is making a risky wager -- that it does not need the great variety of earth's species to survive.

Despite the alarm with which scientists view this trend, biodiversity has just surfaced on the world's political agenda. The troubles of high-profile animals such as the tiger and rhino grab public attention, while most people hardly see the point of worrying about insects or plants. But extinction is the one environmental calamity that is irreversible. As these lowly species disappear unnoticed, they take with them hard-won lessons of survival encoded in their genes over millions of years.

Only 1.7 million of the estimated 5 million to 30 million different life- forms on earth have been cataloged. Since hundreds of thousands of species may be extinct by the year 2000, the world has neither the scientists nor the time to identify the yet uncounted. "It's as though the nations of the world decided to burn their libraries without bothering to see what is in them," said University of Pennsylvania biologist Daniel Janzen at the TIME conference. Harvard's Wilson called this profligacy the "folly" that future generations are least likely to forgive.

Humanity already benefits greatly from the genetic heritage of little-known species. Some 25% of the pharmaceuticals in use in the U.S. today contain ingredients originally derived from wild plants. Hidden anonymously in clumps of vegetation about to be bulldozed or burned might be plants with cures for still unconquered diseases. "I know of three plants with the potential to , treat AIDS," said Janzen. "One grows in an Australian rain forest, one in Panama and one in Costa Rica."

Nature's diversity offers many opportunities for agriculture, especially now that genetic mapping and engineering have given biotechnology firms the potential power to improve crops by transferring genes from wild strains. According to Wilson, biotechnology can transform a plant into a "loose-leaf notebook" from which scientists can select a particular page. Among the possible results: drought- and frost-resistant crops, and natural fertilizers and pesticides.

Diversity is the raw material of earth's wealth, but nature's true creativity lies in the relationships that link various creatures. The coral in a reef or the orchid in a rain forest is part of an ecosystem, a fragile, often delicately balanced conglomeration of supports, checks and balances that integrate life-forms into functioning communities. Given the complex workings of an ecosystem, it is never clear which species, if any, are expendable.

In the tropics the crucial question is how large a forest must be to sustain itself. If a park or protected area is too small to support some of its animal and plant life, the ecosystem will decline even with protection. As yet, no one knows the minimum critical size of a rain forest, but in 1979 Thomas Lovejoy, now at the Smithsonian Institution, set up a 20-year experiment with the cooperation of the Brazilian government to determine just that for the Amazon region. Among the findings: the smaller the forest, the faster the decline of insects, birds and mammals.

Biologists have identified numerous "hot spots" where ecosystems are under attack and large numbers of unique species face an immediate threat of elimination. Among the troubled areas: Madagascar, where more than 90% of the original vegetation has disappeared; the monsoon forests of the Himalayan foothills that are being denuded by villagers in search of firewood, building materials and arable land; New Caledonia, 83% of whose plants occur nowhere else; the eastern slope of the Andes, as well as forests in East Africa, peninsular Malaysia, northeast Australia and along the Atlantic coast of Brazil.

Since less than 5% of the world's tropical forests receive any protection, the stage is set for mass extinctions. Many plants and animals are doomed, no matter what measures are taken. Some researchers estimate that at least 12% of the bird species in the Amazon basin, as well as 15% of the plants in Central and South America, can be counted among what Janzen calls the "living dead." Many tropical mammals and reptiles face only bleak survival under what amounts to house arrest in game parks and zoos.

Why are so many species and environments threatened? The main reason is that throughout the tropics, developing nations are struggling to feed their peoples and raise cash to make payments on international debts. Many countries are chopping down their forests for the sake of timber exports. In Central America forests are giving way to cattle ranches, which supply beef to American fast-food chains. The pressures on forests have led Janzen, who has spent 26 years struggling to save Costa Rica's woodlands, to conclude that "everything outside parks will be gone, and everything inside the parks is threatened."

Efforts to stop the destruction run into moral as well as practical obstacles. How can developed nations demand onerous debt payments and ask the debtors to preserve their forests? How can countries worry about biodiversity when their people are concerned with feeding themselves?

To begin with, the rich nations must reduce the debt burden of the poor. But just as important is a concerted campaign to convince the people of developing countries that it is in their own long-term interest to preserve their environments. Wiping out forests may make developing nations momentarily richer, but it is bound to produce a poorer future.

Experience has shown the Third World that destruction of forests can have disastrous consequences. Forests are vital watersheds that absorb excess moisture and anchor topsoil. Deforestation contributed to the recent droughts in Africa and the devastating mud slides in Rio de Janeiro last year. In Costa Rica topsoil eroded from bald hills has greatly shortened the life of an expensive hydroelectric dam. Alvaro Umana, Costa Rica's Minister of Industry, Energy and Mines, estimated that the surrounding watershed might have been protected 20 years ago for a cost of $5 million. Now the government must reforest the watershed at ten times that price.

Halting the assault on biodiversity will not be easy, but there are many actions that governments can take. First, they should develop and support local scientific institutions that train professionals in conservation techniques. More money should flow into educational programs that alert people to the irreversible consequences of a loss of genetic diversity. An international, environmental version of the Peace Corps could spread conservation expertise to the Third World.

Throughout the developing nations there are encouraging stirrings of local environmental activity. In Malaysia blowgun-armed Penan tribesmen have joined forces with environmentalists in an effort to stop rampant logging. And in Brazil, which has some 500 conservation organizations, environmentalist Jose Pedro de Oliveira Costa organized a coalition of legislators, conservationists, industrialists and media barons to stir public support to preserve Brazil's remaining Atlantic forests. "The threats to the forests remain," said Costa, "but now at least there is a network in place to scream when a threat arises."

But environmental protection must make economic sense, and development must go hand in hand with preservation. Development should be sustainable, meaning that it should use up resources no faster than they can be regenerated by nature. Governments and private firms should organize projects to show that forests can be used without being obliterated. If trees are cut selectively, forests can yield profits and survive to produce more money in the future. Another way to harvest cash from forests and other habitats is to set up tours and safaris to attract animal lovers and photography buffs. Long a moneymaker in Africa and the Galapagos Islands, this "ecotourism" is spreading to such places as Costa Rica.

For sustainable development to work, observed Paulo Nogueira-Neto, environmental adviser to the Brazilian Ministry of Culture, governments will have to devise comprehensive national zoning plans so that their countries can achieve the right mix of preservation and economic growth. Local residents can be encouraged to earn a livelihood in the more robust areas, while habitats that are fragile can be protected. Sustainable development can proceed, noted Kenneth Piddington, director of the environmental department of the World Bank, "right up to a park's boundary."

Financial as well as political leverage can be used in the cause of preservation. Governments should force local lending institutions to review the environmental consequences of proposed loans. No bank, for example, should be allowed to lend a company money to set up a cattle ranch if the operation would destroy too large a section of an endangered forest.

Finally, the unfortunate reality is that many habitats are not going to be , saved. To prevent the genetic legacy of those areas from being extinguished, as many species as possible should be preserved in zoos, botanical gardens and other "gene banks." There, scientists can study a small percentage of threatened organisms and have the options of later returning them to the wild or transplanting some of their genes into other species.

But the best place to preserve the earth's biodiversity is in the ecosystems that gave rise to it. Man must abandon the belief that the natural order is mere stuff to be managed and domesticated, and accept that humans, like other creatures, depend on a web of life that must be disturbed as little as possible.

contact Eugene Linden

Short Take

I’ve just read Black Edge, by Sheelah Kolhatkar, which is about the huge insider trading scam that characterized Steve Cohen’s SAC Capital at the height of its power. I’m going to offer the thoughts it prompted in two parts. The first will delve into the trade itself, and the second will explore the fallout from this insider trading scandal and subsequent events in the market.

Part One:

A good part of Black Edge focuses on one specific instance of insider trading at SAC Capital: Mathew Martoma’s quest for advance knowledge of the results of trials on the efficacy of Elan Pharmaceutical’s experimental drug to halt Alzheimer’s disease. The drug, bapineuzumab, was designed to attack the amyloid plaques that Elan’s scientists viewed as the cause of cognitive decline. In his quest for “black edge” (illegal inside information) Martoma and his compatriots compromised the integrity of the procedures for drug trials and ruined the life and reputation of a distinguished scientist.  Even that wasn’t enough for them. SAC also had access to vast amounts of biotech expertise, both from PhDs on their payroll, and the expert networks they paid handsomely to give them access to researchers with direct access to the studies and trials.

 

In the short run, this inside information paid off for SAC as Martoma’s advance knowledge of the results allowed the hedge fund to reverse a billion dollar position and make a profit of over $180 million versus certain losses of hundreds of millions had they not gotten advance information on a disappointing field trial. In the long run, while Steve Cohen skated, the insider cases led to $1.8 billion in fines, the dissolution of SAC, and jail time for Martoma.

 

In retrospect, it was all so stupid. SAC could have come to the conclusion that Elan’s drug was not going to work without resorting to anything illegal.

 

Instead of deploying all this massive intellectual firepower on getting advance word on the results of the trials, the analysts might have started by asking how solid were the assumptions on which the therapy was based: namely, whether attacking the plaques would halt or reverse the progress of the disease.

 

Even in 2008 and 2009, there were a number of researchers at distinguished universities who questioned that basic assumption. The alternate theory was that the plaques were not the cause of the disease, but rather an analogue of scabbing, the result of the body’s attempt to protect the brain from infection.

 

 In subsequent years, this alternate view has gained some traction, with some now arguing that Alzheimer’s is akin to an autoimmune disease in the sense that as the environment in developed countries has become more antiseptic, protective devices in the brain have turned on the brain itself as the infections they evolved to fight have disappeared. In any events a drumbeat of failed trials with drugs attacking amyloids has discredited this approach. As Tara Spires-Jones, of Edinburgh University’s Centre for Cognitive and Neural Systems put it in an interview with Britain’s Independent, “Most of the trials have been based on the assumption that amyloid is important in causing Alzherimer’s diseas, as opposed to something that happens alongside it. That assumption, I think, is probably wrong…”

 

Even in 2007, SAC’s analysts should have known that many attempts to fight Alzheimer’s by fighting the formation of plaques had failed. Given all the time the fund spent analyzing the drug and trials it must occurred to someone to ask whether Elan was barking up the wrong tree. Maybe someone there did just that, but there’s no indication that the decision makers ever questioned the assumptions upon which the drug was built.

 

Maybe that wouldn’t have mattered. SAC wanted certainty. Clearly, detailed advance knowledge of the results of a field trial is more compelling than a dissenting theory on the nature of the disease. Had SAC questioned the assumptions of the study, they never would have amassed a position in Elan, and they probably wouldn’t have had sufficient certainty to short the stock prior to the results being announced.

 

What can be drawn from this? There are implications about the pressures of the markets – SAC employees felt that had to cheat to maintain performance – but there are also implications about the culture of world of investing.  Alzheimer’s is a horrifying disease, but the book makes a strong case that neither Cohen, nor anyone else at SAC, gave a rat’s ass whether the drug worked or not; they only cared about knowing the results before anyone else and about how other traders would view the data when it came out.  The same probably applied to every other fund playing Elan.

 

It isn’t news that the markets are amoral, but this amorality has real world consequences. The punishment the market meted out to Elan (and other companies with failed trials) makes all but the largest companies risk averse about investing in therapies for difficult diseases. There is a short-term logic to this from an investor’s point of view, but, increasingly, the market sets research priorities, and the market’s priorities – controlling costs and maximizing short-term profits – may not serve the needs of society. Researchers know that breakthroughs often come from learning from failed previous attempts.  So where will breakthroughs come from as fewer and fewer companies risk failure?

 

Part Two:

 

Further thoughts on Black Edge by Sheelah Kolhatkar

The insider trading scandal at SAC confirmed a widely held suspicion among ordinary investors that Wall Street is a rigged game where powerful players can cheat with impunity.  Regardless of the truth of that suspicion, the widely held perception that this is the case has had its own reverberations. In a delicious irony, one of the derivative effects of the market crash and subsequent insider trading scandals has been to make more likely a future in which black edge is less useful.

 

Bear with me.

 

What happened with Elan revealed a contradiction at the heart of the markets. SAC was driven to seeking black edge by the ruthless competition of the markets. In the minds of their analysts and portfolio managers, access to publicly available information wasn’t enough because competing funds had their own PhDs pouring over the same information. Moreover, competing funds also had access to the same expert networks (which might be viewed as “grey edge”) as did SAC.

 

In such a situation, we’d expect that different analysts would take different perspectives on the prospects of the drug and the trials. I would have expected that at least some analysts would question whether the assumptions behind the drug were correct. The market says that wasn’t the case. Rather the hedge fund world was massively longs before the release of the trial results, and Elan’s subsequent 66% price drop suggests that the herd mentality applied on the way down too.

 

So market efficiency drove SAC and some others to seek black edge, while the subsequent drop exposed a herd mentality and deep inefficiency that made the market anything but a black box that continuously adjusts prices for all information.

 

The result for the markets is analogous to the evolutionary theory of punctuated equilibrium: markets will proceed smoothly until some event produces rapid change. Because, as the crash of 2008 demonstrated, the big price-change inducing event can come from any number of directions inside or outside the economy, many investors are giving up on analysis of individual stocks and moving to passive investment funds and ETFs. The size of this shift is staggering. The amount of managed money in passive strategies has risen from an estimated 6% in 2006 to as much as 40% today (these figures vary depending on definitions of what a constitutes passive strategy).

 

That latter figure may be larger given the relationship between value investing and money moved by algorithms and quantitative strategies.

 

Quantitative types try to beat their peers by focusing on changes in pricing or volatility, and/or seeking an edge through speed and data crunching, rapidly identifying anomalies, and then trading at warp speed. Many hundreds of billions of dollars now take this route into the markets. And results have proven that this approach can work; some of these funds have done fabulously well.

 

So, stepping back, it becomes clear that the trillions of dollars invested through passive strategies and ETFs basically piggybacks on the decisions of active managers relying on traditional analysis of individual companies and sectors. Moreover, the hundreds of billions of dollars of money invested in quantitative, momentum, derivative, and volatility strategies, also piggybacks and even amplifies, the decisions made by traditional investors as those decisions become evident in price movements.

 

So the response to the pain inflicted by past booms and busts and insider trading scandals has created a situation today where the huge amounts of money moves in sync with an ever smaller base of active managers. Value investing based on analysis of individual companies has become an ever-smaller tail wagging an ever larger dog.

 

Perversely, this, in turn, has created a situation where in the next crash, Steve Cohen, the quant and momentum funds, and even the Warren Buffets will ultimately have no edge. All it will take to set the next crash in motion is for a fair number of investors to say, “gee I think I should shift more to cash.” Then the passive investment funds will be forced to sell, and they will sell regardless of the merits of any individual stock. This will cause volatility to rise and the billions of dollars of investments tied to volatility will also start selling, and as this is happening, the algorithmic traders, the momo guys and the others looking for direction to exploit will jump in juicing the sell off.  The trigger might be some external event, or something as banal as a simple change in mood, but no insider will have any better insight as to when this occurs than anyone with access to a newspaper.

 

As a coda, it’s worth noting that Steve Cohen has now been cleared to manage other people’s money. At the end of Black Edge the author quotes a savvy market player as saying that the day Cohen could do that, money would come pouring in. Well, according to the New York Times, that day is here and money is not pouring in. Maybe this is because his fees are too high, or because the insider trading scandal has made him tainted goods. Or maybe, it’s because investors doubt that he can achieve his former results without black edge.



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